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Eye on the Bailout

The administration has been on a PR offensive in recent months to tell the good news about the TARP. As the Treasury Department official in charge of the TARP is saying at a congressional hearing this morning, the bailout won't cost anywhere near the full $700 billion Congress authorized. In fact, many of its investments have turned a profit and some of its most infamous bailouts -- such as the rescue of AIG -- won't end up being the tax dollar black holes they once seemed sure to be.

After two years and half a trillion dollars, the federal bailout fund is set to expire Oct. 3. After that, the government won't be able to start new programs through the bailout, though it can continue paying money that's already committed.

We've been following every dollar via our Bailout Tracker. But with the end now in sight, we've decided it's time to get a bit nostalgic, take a step back and look at the bailout's recipients and programs that have shined -- and those that have flopped.

Last weekend, The Wall Street Journal highlighted new academic research showing that investors may be trading on insider information after companies approach hedge funds for loans.

Researchers found that on average, in the five days before companies announce a loan from a hedge fund, the volume of short sales increases by 75 percent as compared with the 60 days before a deal is announced. There was no comparable uptick in betting against companies that borrowed money from commercial banks instead.

With short selling, hedge funds and other investors make money by wagering that a stock's price will fall. Borrowing from hedge funds rather than commercial banks can be seen as a sign of distress, as hedge funds tend to charge higher interest rates.

Deep in an article today on the government's bailout of AIG, The New York Times cites sources saying that the Treasury Department's "point man" on AIG, Don Jester, was a former Goldman Sachs employee who owned stock in the bank even as he was making decisions on the bailout that ultimately channeled billions of taxpayer dollars to Goldman.

Owning stock in a company an official oversees typically is verboten, but because Jester was working as an outside contractor rather than an official employee, he was exempt from conflict-of interest rules.

Goldman Sachs stood to benefit from the AIG bailout because Goldman had roughly $20 billion in insurance-like credit-default swaps with AIG -- essentially bets by the investment bank that the housing market would go south. But if AIG collapsed, Goldman wouldn't be able to collect on the bets. When the government instead bailed out AIG, taxpayers paid out the swaps at full face value, and Goldman Sachs got $12.9 billion -- more than any other of AIG's customers.

After a 20-hour, all-night session, Senate and House negotiators agreed last Friday on a compromise financial reform bill meant to prevent future economic meltdowns. Just before the bill was being finalized, former SEC Chairman Arthur Levitt wrote a scathing op-ed in The Wall Street Journal, saying the bill was "bled dry of nearly every meaningful protection of investors." Levitt headed the SEC from 1993 to 2001, leaving just before the accounting scandals of Enron and WorldCom erupted, and is now an adviser to Goldman Sachs and the Carlyle Group, a private equity firm.

As the dust settled last Friday, we checked in with Levitt to understand just why he believes the bill, as he says, "totally left investors in the dust." Here are his thoughts on the topic.